The offer of tax-preferred employee benefits is never simple—you must learn and follow all the rules. However, simply following the rules will not maximize the value—for plan sponsors or participants. The first 20 years of HSA experience include an extensive list of programs that underperformed.
“A pessimist sees the difficulty in every opportunity: an optimist sees the opportunity in every difficulty.”[i]
Here is my Top 10 list of HSA risks, the issues and usage that I believe have impeded a full embrace of HSAs. For suspense, I present them in Letterman-style.[ii] So, if you think you know the #1 risk when it comes to offering HSAs, write it down now and see if you agree with me at the end of this article.
Whether or not you offer HSA-capable coverage today, consider:
Risk No. 10: Getting “High:” How “high” is “High,” anyway? The 2023 minimum deductible for HSA-capable coverage is $1,500. For comparison, a $100 deductible in 1970, indexed for medical inflation, would exceed $4,100 today![iii] The average deductible for health coverage in 2021 was $1,669[iv]. “High” is a misnomer. Just because the tax code calls it a “High Deductible” plan does not mean you have to. (Re)position/(re)name your HSA-capable coverage to (re)orient your marketing to focus on savings – not spending.
Risk No. 9: HSAs ≠ FSA: FS(pend)A ≠ HS(ave)A. FSAs = spending accounts. HSAs = savings accounts. Unlike FSAs, HSA monies are always vested and never forfeited. You invest HSA monies and accumulate. The HSA is not a “Super-FSA.”
Risk No. 8: “Cold-Turkey” Conversion: This year’s Thanksgiving Day will be marred by declines in real wages[v] and more paycheck-to-paycheck living.[vi] Annual enrollment marketing must anticipate workers will be unprepared.
Most Americans have less than $500 in medical expenses yearly [vii].
So, why do employees favor copay designs? Simply, many are unprepared for a shift from a copay-oriented PPO or HMO to HSA-capable coverage. It would be comparable to stepping into an icy cold shower. Brrr… Solutions exist to ease the transition.
Risk No. 7: Deduct-a-phobia: Many suffer from what behavioral economists call “availability bias”— that is the tendency to overestimate the likelihood of an event with greater “availability” in memory, where people are influenced by how emotionally charged or significant the event may have been or might be. Simply said, we tend to focus on the potential for catastrophic medical costs, not the everyday.
The solution is to avoid communications focused on the nominal amount of deductibles in favor of the difference in deductibles between the PPO and the HSA-capable coverage options, further adjusting for the employer’s HSA contribution.
Risk No. 6: Understating HSA Utility: HSAs are America’s most utilitarian benefit—HSA assets can satisfy expenses from a variety of life events. HSA assets can meet different needs at different stages of life—expenses while employed, expenses in retirement, income in retirement, and survivor benefits.[viii]
Other unique aspects of HSA utility/value include serving as an anti-selection sentinel, as an executive benefit, income tax averaging, a vehicle to avoid IRMAA[ix], as performance-based compensation, as a retiree medical funding option, and as a Health Reform comparison “anchor.”
Risk No. 5: Failure to Invest: Saving isn’t investing. In that way, most HSAs mimic FSAs—as most HSA investments remain in capital preservation (cash-equivalent) accounts.[x]
Risk No. 4: Indecisiveness: Most plan sponsors add HSA-capable coverage as a choice alongside existing PPO and HMO options. That’s likely a mistake for one or more reasons: The annual enrollment default, the failure to adjust the existing PPO or HMO facilitate comparisons, the lack of “informed enrollment”, and the shortcomings of the Summary of Benefits Coverage mandated disclosure.
Risk No. 3: Myopia: Unfortunately, most plan sponsors focus employee attention at annual enrollment on coverage needs limited to the following year. We have done that for decades. That’s myopic and short-sighted. It devalues HSA utility – value today and tomorrow.
How can plan sponsors avoid that outcome? Simple, add an HSA-capable coverage option on December 1st, 2022!
Risk No. 2: Failure to Prepare: This is the other side of that same myopia coin—resulting from individuals focusing so much on that next year. Behavioral economists would describe this as a present bias. Importantly, humans all too often assume that existing choices or options will always be available. Too many think the status quo will never change. It just isn’t so—life throws us a curve ball from time to time. Think recession, COVID, and involuntary separation from employment. Simply, many of us have … “trouble with the curve.” When it comes to the “status quo,” remember that medical expenses almost always increase with age.[xi]
Risk No. 1: Not Offering An HSA: The worst outcomes result from those who failed to adopt HSA-capable coverage—that is true for both the plan sponsor and the participant. Few can afford to pass up on the tax savings and reduced medical spend. Yet, here we are, 20 years later.
“Nothing is more expensive than a missed opportunity.”[xii]
Plan sponsors who fail to offer America’s most tax-preferred benefit are at as much of a competitive disadvantage as those who don’t offer a 401k. Do not forget:
“You miss 100% of the shots you don’t take.”[xiii]
It has been 20 years since Congress added HSAs to the tax code. Given the subsequent legislative and regulatory actions, as well as growth in the number of HSA accounts and assets, HSAs look like a “keeper.” So, what are you waiting for?
I am always interested in your comments, corrections, criticisms, and suggestions. Happy to guide you should you decide to introduce HSA-capable coverage alongside your 401k. Feel free to e-mail me at jacktowarnicky@gmail.com.
SEE ALSO:
• HSAs and 401ks—Better Together (Part One)
• Why HSAs and 401ks Are Better Together (Part Two)
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications, and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
[i] Winston Churchill
[ii] David Letterman, The Late Show, Top 10 (order of importance in descending order – 10 – least, 1 – most)
[iii] Author’s calculation using the annual average increase in National Health Expenditures of 7.4%/year 1970 – 2019.
[iv] Kaiser Family Foundation, 2021 Employer Health Benefits Survey, 11/10/21, Accessed 10/22/22 at: https://www.kff.org/report-section/ehbs-2021-summary-of-findings/
[v] R. Rich, J. Tracy, M. Krohn, More Workers Find Their Wages Falling Even Further Behind Inflation, Dallas Federal Reserve Bank, 10/4/22. Despite the stronger wage growth due to the tightness of the labor market, … the current time period is unparalleled in terms of the challenge employed workers face … for workers who experienced a decline in their real wage in second quarter 2022, the median decline was 8.6 percent.” Accessed 10/22/22 at: https://www.dallasfed.org/research/economics/2022/1004?utm_source=cvent&utm_medium=email&utm_campaign=dfe
[vi] Getting Paid in America, American Payroll Association, 9/14/22. “Number of Americans living paycheck to paycheck has increased. … Seventy-two percent of Americans would experience financial difficulty if their paychecks were delayed for a week.” Accessed 10/22/22 at: https://www.prnewswire.com/news-releases/number-of-americans-living-paycheck-to-paycheck-has-increased-301624801.html
[vii] J. Ortaliza, M. McGough, E. Wager, G. Claxton, K. Amin, How do health expenditures vary across the population? Kaiser Family Foundation, 11/12/21, Accessed 10/22/22 at: https://www.healthsystemtracker.org/chart-collection/health-expenditures-vary-across-population/
[viii] J. Towarnicky, Maximum Utility: Your HSA Can Do Quadruple Duty, Benefits Quarterly, 2nd Quarter 2021.
[ix] Income Related Monthly Adjustment Amount surcharges for Medicare Part B and Part D coverage.
[x] Devenir, 2022 Midyear HSA Research Report, 9/20/22. “More HSAs investing. Over 2.4 million health savings accounts have at least a portion of their HSA dollars invested, representing over 7% of all accounts.”, Accessed 10/22/22 at: https://www.devenir.com/research/2022-midyear-devenir-hsa-research-report/
[xi] J. Ortaliza, M. McGough, E. Wager, G. Claxton, K. Amin, Note vii, supra
[xii] H. Jackson Brown, Jr.
[xiii] Wayne Gretzky, Hockey GOAT
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.